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Overdraft Fees

Michael Mierzewski is a Partner in the Washington, D.C., office of Arnold & Porter,
where he concentrates his practice on financial institutions and corporate and securities
law.

Michael A. Mancusi is a Partner in the Washington, D.C., office of Arnold & Porter,
where he represents domestic and foreign banks, credit unions and other financial
services clients in a wide range of state and federal regulatory, compliance and enforcement
matters.

Rachel Rodman is Counsel in the Washington, D.C., office of Arnold & Porter, where
she counsels and represents banks and consumer financial services companies in a broad
range of regulatory matters, including examinations, investigations and litigation
brought by federal and state regulators.

The Consumer Financial Protection Bureau (CFPB) has released a series of publications
that may provide good reason for banks to thoughtfully assess their deposit account
practices. Recently, the CFPB released an analysis of overdraft and nonsufficient fund (NSF)
fee revenues that examines data from more than 600 banks' call reports. This in-depth
analysis, combined with CFPB Director Richard Cordray's Feb. 3 letter to financial
institutions and the agency's expected proposed rule on overdraft programs, indicates
increased scrutiny of bank overdraft practices.

Indeed, in a blog post releasing the overdraft fee analysis, the CFPB stated that
it is “currently looking closely at overdraft practices and will continue to analyze
this data to better monitor and understand overdraft programs in the market and the
consumer experience.” Banks should take note of this development and take the opportunity
now to review and assess their overdraft products and practices.

The CFPB’s Developing Interest in Deposit Products and Overdrafts

In his Feb. 3 letter, which was sent to 25 major retail banking companies, Cordray
suggested that these institutions should consider making available to their customers
a “viable choice of a lower-risk account that promises no authorized overdrafts.”
Expressing concern that many consumers may not be able to choose an account that is
right for them because of what the CFPB perceives as the limited availability and
visibility of consumer-friendly products, the letter urged banks to consider offering
lower-risk products to consumers, irrespective of whether there is any regulatory
requirement to do so.

The CFPB's interest and scrutiny of deposit accounts has been progressive and consistent,
much like the CFPB's focus on other products, terms and conditions, and services,
such as arbitration clauses and payday lending. First, in 2012, the CFPB issued a
request for information on bank and credit union overdraft programs. In 2013, the
CFPB published a study of overdraft programs, and then in 2014, it published data
points detailing overdraft programs' impact on consumers.

Last year, the CFPB brought two enforcement actions against banks for violations relating
to their deposit account practices. For each of these actions, the unfair practices
involved situations in which bank depositors incorrectly tallied the check amounts
in their own deposits. The CFPB and other agencies indicated that the alleged bank
unfair practice was not taking adequate measures to discover and correct the depositor's
error when the error amount was below a bank-established threshold, which the CFPB
deemed to be too high.

In April 2015, the CFPB took its first enforcement action relating to overdraft fees,
alleging that the bank violated the Electronic Fund Transfer Act, by failing to obtain
an affirmative “opt-in” from certain of its customers before charging them overdraft
fees in connection with automated teller machine (ATM) and one-time debit card transactions.
The CFPB also alleged the bank violated the Consumer Financial Protection Act of 2010
by deceptively representing to consumers that it would not charge overdraft fees in
connection with ATM and one-time debit card transactions absent an opt-in, and deceptively
representing to consumers that it would not charge overdraft fees in connection with
loan repayments under the bank's deposit advance product. The bank refunded approximately
$49 million in fees, and the CPFB ordered the bank to pay a $7.5 million civil money
penalty.

Then, in August 2015, the CFPB, Office of the Comptroller of the Currency (OCC), and
the Federal Deposit Insurance Corp. (FDIC) took a coordinated action against a bank
and its affiliates for failing to credit consumers the full amounts of their deposited
funds in checking and savings accounts. The CFPB alleged that the bank committed unfair,
deceptive, or abusive acts or practices (UDAAP) violations (as discussed below) by
unfairly processing deposits such that certain customers did not receive credit for
the full amount of deposited funds, and by providing deceptive disclosures relating
to the deposit process. Separately, the OCC and FDIC each filed orders alleging unfair or deceptive practices under Section 5 of the Federal
Trade Commission Act, which the OCC and FDIC, under Section 8 of the Federal Deposit
Insurance Act, are empowered to enforce. The bank paid approximately $11 million in
redress to affected consumers and was ordered to pay civil money penalties of $7.5
million to the CFPB, $10 million to the OCC and
$3 million to the FDIC.

Finally, as noted above, it is expected that the CFPB will issue a proposed overdraft
rule this year, with the goal of making the overdraft market fairer and more transparent.
Although the CFPB has provided limited insight into the timing of the proposed rule,
it included overdraft products, under the broader category of “open-use credit,” as
one of the CFPB's “near term priority goals” in a February release detailing policy
priorities over the next two years.

CFPB Scrutiny of Call Report Data

The CFPB's recently released overdraft analysis examines the call report data of more
than 600 banks provided in Item 15 of revised Schedule RI — “Components of service
charges on deposit accounts (in domestic offices).”
Information is required from banks with $1 billion or more in total assets that offer
one or more consumer deposit account products (i.e., transaction account or nontransaction
savings account deposit products intended primarily for individuals for personal,
household or family use). Specifically, Item 15 requires banks to list consumer overdraft-related
charges, periodic maintenance charges, ATM fees, and all other service charges on deposit
accounts.

This disaggregation of overdraft-related charges from other deposit fees across hundreds
of financial institutions provides the CFPB with new visibility into banks' overdraft
practices. The CFPB may use this visibility to aid its supervision and enforcement
efforts. For example, the Item 15 data provides the CFPB with a metric on which it
could compare overdraft revenue percentages against peer institutions, and then identify
outliers. Indeed, the regulatory agencies' use of peer institution data comparisons
is not a new phenomenon and is increasingly being employed as a means to assess bank
compliance in other areas, such as fair lending. This new overdraft metric provides
another tool for the CFPB to conduct holistic supervision of the industry's offering
of overdraft services.

Call Report Data as a Component of CFPB Enforcement Actions

In addition to the potential interest of the CFPB's supervisory staff, the agency's
enforcement division may also take an interest in overdraft practices. In a manner
not unlike its approach in the debt-collection space, the CFPB could use its broad
enforcement authority to police UDAAPs to remediate overdraft practices it views as
harmful to consumers, even prior to issuance of rules governing the area. The CFPB
could use its newly analyzed overdraft data in support of such an action.

Under the Dodd-Frank Act, all covered persons or service providers are required to
refrain from committing UDAAPs. Although high overdraft fees relative to peer institutions
would not, by themselves, constitute a UDAAP, they may well be viewed by the CFPB
as an indication of improper practices in a bank's presentation or administration
of overdraft services. To complete its case, the CFPB would likely probe the underlying
reasons for the disparity by looking at various factors. For example, after making
a finding of overdraft revenue dissimilar to that of peer institutions, the CFPB might
inquire into the bank's opt-in rate and compare it to the overall industry opt-in
rate examined during the 2013 overdraft study. The CFPB may also investigate whether
the bank's customer base has a particular need for overdraft services or whether the
bank's sales or marketing campaigns contain misleading statements about the service
that improperly increased consumer opt-in rates. Banks would be wise to anticipate
and consider these different inquiries.

How Should Banks Respond?

The CFPB will likely use its overdraft analysis, together with its consumer complaint
data and other internal analyses, to inform its supervision and enforcement priorities
and efforts. Should the CFPB develop an interest in your bank's deposit and overdraft
practices, expect inquiries into the underlying documents and data supporting those
practices, such as copies of the bank's overdraft policies, procedures, deposit agreements,
consumer notices, marketing materials, training materials, sales scripts and summary
or even account-level data.

Moreover, as demonstrated in several other areas of bank regulation, the initiatives
of the CFPB may have a contagious effect on the prudential bank regulators, which
may cause the OCC, FDIC and Federal Reserve Board to begin scrutinizing deposit products
in a similar manner. Indeed, the August 2015 coordinated enforcement action among
the CFPB, OCC and FDIC is not the first demonstration of concerted agency action and
likely will not be the last. Should this trend in bank regulation continue, banks
of all sizes may receive heightened scrutiny of their overdraft products.

As with respect to other preventive steps aimed at weathering agency supervision and
enforcement, our recommendation is that banks proactively review their overdraft fees
as compared to their peers. Banks can then meaningfully use that information to direct
the compliance analysis of their overdraft policies, procedures and marketing practices
before the CFPB offers to conduct an analysis for them.

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